Vanguard Changing Index Benchmarks

Vanguard shocked the investing world today by announcing that they are changing the benchmark of 22 of its funds from MSCI to FTSE indexes. The most note worthy effected fund is the Vanguard Emerging Market ETF, ticker VWO. We believe that one of the reasons for this switch is pricing. MSCI reports that it is losing 24 million in licensing fees in this switch. FTSE maintains that it it is the better index but some argue that the licensing fees are cheaper and that Vanguard will pass on this savings to investors with lower pricing.

There are some notable differences between how the indexes represent certain markets. In the case of emerging markets, it is how certain countries are classified. These classifications can in some cases exclude certain countries from an index. FTSE does not consider South Korea an emerging country where MSCI does. The chart below has a full break down of where the indexes differ in their classifications.

The performance of FTSE and MSCI indices are very similar, but the MSCI index has the better one year results, probably do to the inclusion of South Korea in the index.

Inv 1 = FTSE

Inv 2 = MSCI

If VWO and the 21 other Vanguard funds are cheaper with similar performance, the investor wins. These changes will not take place overnight. Vanguard said in its press release that changes will take place over five months at the beginning of 2013.

More about the switch from Routers, Index Universe.